How will your spending habits change in retirement?It will come as a surprise to nobody that retirement is one of the biggest lifestyle changes you’ll ever experience. But as your priorities shift and the free time available to you increases, what you might not be as aware of is the way in which your spending habits are likely to alter too.
A recent study analysed the spending patterns of households during the first six years of them entering retirement. Surprisingly, nearly half of the households (45.9%) actually spent more in the first two years than they had before retiring, declining to 33.4% by the sixth retirement year. This wasn’t just seen in wealthier households either; the distribution across income levels was roughly the same. So what are pensioners spending their money on, and why are so many spending more than before they retired?
Many spending choices have been given a boost thanks to the recent introduction of pension freedoms, making big one-off spends that much easier. Holidays are popular, with around a third of those aged between 55 and 75 planning to take a lump sum to enjoy some time travelling, many indicating they were looking to spend anywhere in the region of £2,000 to £5,000 on a luxury trip away. One of the more conventional forms of expenditure is home improvement, with around 20% of pensioners planning to put their savings towards doing up their home. It’s not just general DIY either, as many mention they plan to splash out on a new kitchen for their retirement.
The things money is being spent on by retirees offers a few surprises too. Around one in ten people aged 55 and over plan to use their savings to start up a small business or go into consultancy. Others are looking to invest their pensions in property, with the fairly recent boom in the buy-to-let mortgage market accommodating this new desire. And just as the ‘Bank of Mum and Dad’ has become more and more prolific, the ‘Bank of Gran and Grandad’ is also on the rise, with around a third of retirees using their savings to help out younger family members with university fees and living costs.
Negative interest rates and how they might affect your finances
Wednesday, August 17th, 2016With the Bank of England cutting UK interest rates this month for the first time since 2009 to just 0.25%, it looks more likely than ever that Britain could experience negative interest rates. The idea of negative interest rates has moved from theory to reality following the 2008 financial crisis, with several central banks in Europe introducing rates below zero since 2014, with Japan following suit earlier this year.
In simple terms, a negative interest rate means that those keeping money in a bank account are paying for the privilege of doing so, whilst borrowers are being paid to take out loans. The idea is that setting interest in this way will stimulate the economy, encouraging people to spend and incentivising banks to lend money more freely.
The governor of the Bank of England, Mark Carney, has indicated that, should the UK economy worsen, rates could go even lower than the 0.25% record low they are currently at. Is he hinting at a negative interest rate? Only time will tell. But with the economy potentially taking a further hit following the vote for Brexit in the EU referendum, being prepared for the potential of negative interest rates is a good idea.
The worry of many before negative interest rates became a reality was that it would lead to people withdrawing their money from the banks to avoid paying interest, but this has not proven to be the case in countries such as Sweden, where negative rates were first introduced. Those who don’t want to pay for their bank account can of course opt for hard cash, but most will almost certainly choose the convenience and security of keeping their money in a bank even if they begrudge paying to do so.
A negative interest rate would also have an impact on savings accounts such as ISAs. Whilst savers wouldn’t be paying money to the bank in the same way as with a bank account, the interest they would be earning would of course shrink in line with the negative rate, resulting in a smaller return on their investment.
For those looking to buy a house, however, a negative interest rate would likely be a positive. With the recent cut to 0.25%, an average priced property of £211,000 sees a reduction of £22 a month for a variable repayment mortgage over 25 years. Lowering the interest rate further would result in even greater payment reductions. Fixed rate mortgages would not be directly affected, but the new deals on offer from banks and building societies would likely become even more competitively priced.
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